Shareholder’s agreements commonly contain “shotgun offer” provisions. These are contract clauses that permit a shareholder to offer to purchase the other shareholders’ shares for a set price. The “shotgun” arises because the other shareholders usually have the right to turn around and buy the shares from the shareholder making the offer, for the very same price. The idea is to force shareholders who are making an offer to buyout shares, to do so for a reasonable price, lest the tables can be turned on the offeror.
In a recent British Columbia Court of Appeal decision, Blackmore Management Inc. v. Carmanah Management Corporation, 2022 BCCA 117, the court ruled on whether a “shotgun offer” can be revoked before it has been accepted.
A shotgun offer results in a forced sale of shares and ends the shareholder relationship between the parties. Essentially, the party invoking the clause offers to buy the other party’s shares at a specified price, or to sell its own shares to the other party at the same price.
In this case, the Petitioner, Blackmore Management Inc. (“Blackmore”), and the Respondents, Carmanah Management Corporation, and Amphitrite Management Inc., each owned one-third of First Light Technologies Inc. (“FLT”).
After failed negotiations, the Respondents invoked the shotgun clause by delivering a notice to Blackmore in which they offered to buy Blackmore’s interest for $1,500,001 or to sell their interests on the same valuation. The election period was set for 60 days. The offer read as follows:
“In accordance with Section 5.2 of the Shareholders Agreement, you have sixty (60) days from the date of delivery of this letter to respond. You may accept the Compulsory Offer at any time within the sixty (60) day period. If you do not respond within sixty (60) days, you will be deemed to have accepted the offer in accordance with Section 5.5 of the Shareholders Agreement.”
Blackmore attempted to stop the clock in order to receive accounting records to assist them in evaluating the offer. Blackmore filed a petition for the relief and the Respondents agreed to suspend the election period until the hearing took place the following week on March 25, 2020. However, due to the COVID-19 pandemic, the hearing was never held the following week.
The parties agreed to re-schedule the hearing for August 17, 2020.
By June 2020, the parties became aware that FLT had increased in value “by an amount that was not insignificant”. One week after agreeing to the August hearing date, the Respondents wrote to Blackmore purporting to revoke the shotgun offer on the basis that world events and Blackmore’s commencement of legal proceedings had fundamentally changed the circumstances relating to the shotgun offer.
Conversely, Blackmore delivered a notice to the Respondents, electing to purchase the Respondents’ shares at the valuation stipulated in the shotgun offer and litigation ensued.
The judge reasoned that finding a shotgun offer was irrevocable would require reading in a significant term to which the parties had not agreed. He said:
[60] In my opinion, interpreting the ASA in the manner advocated by the petitioners would entail reading into the agreement a significant term that I am not convinced the parties considered or, more importantly, agreed to. More to the point, the fact that the ASA contains no language that suggests a compulsory buy-out offer made under Article 5 of the agreement is irrevocable means, in my view, that the general principles of contractual interpretation apply and that such an offer can be revoked, unless the parties have otherwise agreed.
…
[63] … The parties to the ASA did not include any reference to a compulsory buy-out offer being irrevocable. Consequently, I find the petitioners’ position on this issue would result in the Court reading into the ASA a significant and material term that the parties did not see fit to include.
The Court of Appeal reversed the decision and held that whether the respondents were entitled to revoke the shotgun offer rested on the proper interpretation of the shareholders’ agreement as a whole:
[33] In my view, given the plain meaning of the agreement in light of the surrounding circumstances, the shareholders intended the shotgun offer to be irrevocable during the 60-day election period
…
[36] The ordinary meaning of these provisions is that once the clause is invoked, the process cannot be stopped — the shareholder relationship will be severed.
The Court of Appeal rejected the argument that the shotgun offer was a mere “offer” and held that “if a notice under article 5.1 is nothing more than an offer to form a new contract, it would be open to the recipient to simply refuse it and put an end to the process. This outcome would be inconsistent with the mandatory language of the clause”.
The Court of Appeal held that the surrounding circumstances and commercial principles also support the position that a shotgun offer is irrevocable during the election period:
[43] The commercial purpose of a shotgun clause is to provide a mechanism for shareholders to terminate the shareholder relationship by forcing a sale of one shareholder’s interest in the company… An interpretation that would allow the shotgun process to be unilaterally stopped once triggered is inconsistent with this objective.
[44] … To conclude that shotgun offers are revocable absent an agreement to that effect would weaken the incentive for shareholders to make a fair offer…
In this case, once the respondents invoked the shotgun clause, they were bound by the consequences. It is clear going forward that parties will have to pay greater attention to the language used in the contract as the Court will be tasked with the exercise of contractual interpretation to determine the objective intentions of the parties.
For assistance with a contract dispute or any other litigation concerns, please contact any member of our General Litigation Group.
 |
Jasmin Chohan Lawyer | General Litigation Vancouver |
This article is intended to be an overview of the law and is for informational purposes only. Readers are cautioned that this article does not constitute legal or professional advice and should not be relied on as such. Rather, readers should obtain specific legal advice in relation to the issues they are facing.